Corporate actions often give cues about current business health and indicate how the stock is likely to perform in near future. Corporate actions bring material changes to a company, and often directly affect stakeholders. The recent announcement of Vedanta Resources Ltd.'s proposal to delist its Indian subsidiary, Vedanta Ltd. from the Indian bourses has sent quivers down D-Street, yet again.
The promoter group, Vedanta Resources Ltd. (VRL) made an offer price of Rs. 87.50 to buy out minority and non-promoter shareholding in Vedanta Ltd (Vedanta). While the offer price appears to be at a premium of 9.9% from the closing price of Rs. 79.6 on May 11, a deeper look into the company's books demonstrates a stronger intrinsic value. The company's book value stands at around Rs. 215 per share with Rs. 180 being the 52-week high price. However, in the light of the challenges posed by COVID-19 pandemic, the stock fell over 40% in 2020 as did the stocks of numerous companies. Simply put, the current share price is heavily undervalued and does not accurately reflect the true valuation and earning potential of the company.
Why Delist now?
Typically, companies opt for delisting when they have eyes set on expansion, restructuring, or promoters hoping to increase their holding. Vedanta, as an illustration of voluntary delisting, should customarily offer its shareholders a price well over the stock prices and more aligned with the book value and earning potential of the company. Let alone what's fair to the public, there are several advantages to the company and its proportionate disadvantages to the public at large.
For the promoter group, the proposed delisting affords improved operational and economic flexibility to its capital-intensive natural resource and mining businesses. With lesser interruptions by dissenting shareholders, the promoter can regain control and is likely to call the shots during such unprecedented times. Consequently, the delisting transaction will lead to debt reduction and provide a bullish growth trajectory in the long run. Besides obvious business benefits, the proposed delisting offers immediate and certain realization value to its shareholders in times of an economic slowdown and market volatility leading to a win-win situation for the company and its shareholders.
Cutting a Fair Deal
Today, on May 18, Vedanta Limited's board of directors will consider the delisting by their promoter posing a question whether it's going to look down at minority interests or not. While the offer price represents a 9.9% premium over the then market price, it fails to reflect fairness and seriousness and can be described as opportunist on the part of Vedanta!
However, directors ought to have a duty towards their shareholders i.e. public throughout the process of delisting. Vedanta's rating as per S&P was downgraded in March giving $3bn debt and much more contingent to end quarter of 2021. Earlier in 2018, Vedanta's promoters already delisted the VRL from LSE (London Stock Exchange). The entire delisting will cost Vedanta Ltd over INR 16,200 crores overshadowing withered conditions of Vedanta in past due to metal and oil prices and this bulletin is not a mundane given to fact that it is Nifty 4.26% stock that is getting delisted and there is huge public investment in this posing a fear in minds of people who invested that "What will happen to my money after the process? Would it be only a one day process?"
The Long Haul
Rome was not built in a day, and delisting clearly takes longer than "a day" as it is only going to be toggled as per SEBI guidelines. For instance, Essar's delisting process took over 4 years for completion. The entire process of VRL's delisting initiates with a board meeting, which happens to be today! It is pertinent to note that the offer price of INR 87.50 is not the final price, but only an indicative price as per SEBI rules and regulations. The Board decides whether to go ahead with the delisting and subsequently intimate the stock exchange of its decision.
After the meeting, for Vedanta Delisting a final approval is sought from shareholders, foreign institutional investors, portfolio investors, domestic institutions etc., through a "special resolution" which if approved, must be notified to stock exchange on principle agreement by shareholders. If such affirming condition arises, entire delisting process ends here. However, if shareholders did not put their foot down to this, merchant bankers role come into picture who will act as in-charge of this Vedanta's delisting process leading through funds of entire process. Thereby, reverse book building process comes into picture, whereby merchant bankers tend to understand the price at which investors might agree to sell shares. In a nutshell, bridging the gap between shareholder expectations and the company's offer price and reaching a consensus maybe an onerous task and also pulls back a curtain whether the proposed delisting of Vedanta will succeed or not.
In the case of Vedanta, individual retail investors, FIIs, DIIs, Mutual Funds collectively hold about 49.86% of the shareholding. But individually, retail investors hold 7.26% and high net worth individuals with .28%, Mutual Funds hold about 10.91%, Foreign Institutions about 15.18%; thus leaving negligible power at the grass-root level to influence the delisting process.
Conclusion
In the event if public or minority shareholders are not ready with this delisting and risk their shares, hold on shares can still be in picture. However, those shares will have nil to zero liquidity leaving them in a dead man walking state. By then, Vedanta Ltd. will be delisted barring their shares off the Indian stock exchanges. Moreoso, dependency can be shadowed from the voting stance where shareholders of Vedanta Ltd. will be with an opportunity to realize the value of their shares in times of high market volatility.
Over 40 companies have been delisted in the past decade, and it is evident that the path to delisting is time-consuming, requires surmounting various approval-loops and riddled with challenges. While delisting a natural resources and mining giant at low valuation appears to be a smart business move, investor protection takes a backseat with no adequate legal framework to safeguard their interests. In effect, regulatory authorities are unable to provide a conducive regulatory environment balancing the interests of companies and investors alike. While Merchant Banks furnish their due diligence report on the delisting process in the Board meeting scheduled today, on May 18, this corporate action may provide a great opportunity and right occasion for the board to protect investor interests and demonstrate fiduciary duty – balancing the two is going to be a tough call in the present pandemic.
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